The current state of token-based incentive design in user acquisition & retention

The cold start problem is the issue of getting started from nothing - a problem crypto has solved through tokenisation in ways web2 could only begin to imagine. Despite using tokens to solve customer acquisition, we quickly run into problems associated with this, namely, the high acquisition costs, and lack of PMF/retention. Too often, token incentives don’t reward the right kind of users for your protocol. 

Why? Well, token incentives ≠ product market fit as the distribution of large amounts of native tokens from the treasury to historical users operates on the assumption that past usage is a reliable indicator of future engagement. These incentives confuse projects for actual PMF as we too often see protocol metrics fall off sharply after an airdrop occurs.

To date, the majority of token-based customer acquisition has centred around:

1. Airdrops - where projects distribute their native token, almost always for free to existing crypto wallet holders to bootstrap their growth. Whilst great marketing, they do have their flaws.

2. Liquidity Mining - users provide liquidity to a decentralised exchange or protocol and, in return, receive rewards in the form of tokens. 

When we look at the retention of most crypto projects, token-based acquisition is generally short-sighted and paying people to use your product steals from your future. If your game is good, people will play it. If your blockchain is good, you don’t need to pay people to bridge over. If your product is good and solves a problem, people will come back to it. For instance, within the major lending protocols, only MakerDAO’s revenue > token incentives. 

The high cost of customer acquisition

How do we calculate customer/token acquisition cost?

Token incentives are a new form of customer acquisition cost. Each dollar of token incentives corresponds to a new customer or fees/revenue. Projects should ensure their token acquisition cost (TAC) and token incentives to revenue ratio are competitive within their market.

TAC = Token Incentives Spent / Revenue Generated. Like tech startups that burn cash in their early days, it’s okay for protocols to run negative TAC as they optimise for growth but should be mindful of acquisition costs. In the medium run, the aim should be that revenue per user > TAC over a defined period. 

Airdrop acquisition costs can also be calculated as:

• CAC = (Total tokens * token value) / (Number of wallets Retention (%))

• (Where retention is the percentage of wallets that held at least part of the tokens.)

@ParadigmaCa did some CAC analysis of popular airdrops that validated the above as top L2s were paying $1.5-2k / to acquire a single user. 

Retention

Why does retention matter in crypto?

Retention matters in crypto as stickiness in web3 is worse than that of web2. In an environment where speculation is a core use case, extrinsically motivated players will switch and move capital between products in search of returns. 

So how can we look toward incentives being used more as a tool for retention as well as acquisition? Fundamentally, incentives are no replacement for a good product and if your user experience is bad, people will eventually churn. 

If airdrops and liquidity mining are two of the main ways to acquire users, how can we look at retention through the same lens as acquisition through predominantly non-token-based incentives?

Quests

In crypto, acquiring a user is easy as you can incentivise them through tokens however, acquiring a high-value user who intends to benefit from the product is harder and most protocols don’t optimise for LTV. This is a mistake as high-value users will contribute more to the LTV of a product and strategies to increase this should have a greater focus. 

Quests are a good first start, but not the be-all/end-all. Utilising quests helps to educate users about your platform but doesn’t always equate to being a genuine product user. Currently, there’s still a gap between educational engagement (quests) and actual product usage and a need to bridge this. 

What may be preventing them from becoming long-term users? Possible barriers could include 

• a lack of understanding of the full potential of the platform

• not seeing immediate value or utility

• or finding the platform too complex or intimidating to use regularly.

To convert these users, Web3 platforms need to develop strategies that directly address these barriers. 

• Creating more advanced quests that gradually increase in complexity and align with the user's growing understanding.

• Offering incentives for regular use or deeper engagement with the platform.

• Platforms include

  • Flipside Crypto

  • Layer3

  • Project Galaxy

  • Rabbithole

  • Quest3

  • DappBack

  • Crew3

  • CoinList Karma

NFTs

Another idea could be to leverage dynamic NFTs that track on-chain activity.

A rough idea of how this could look:

• The protocol defines its on-chain goals and metrics they want to track/incentivise and decide how it affects the NFT. This can be updated upon each completed milestone, for instance:

  • # Transactions

  • Volume

  • Platform usage 

• Incorporate feedback/tracking - users can see the progress of NFTs and actions required to upgrade them. Gamification of the system can also improve core metrics. 

  • Tied into a reward system - different tiers can unlock benefits such as discounts, access to exclusive content, events and others.

• Engagement/retention can be encouraged through continual incentives to upgrade NFTs

Then, dynamic NFTs could then be used to guide:

• Airdrops allocation

  • Airdrops can be given to NFT holders of different tiers. With many chains offering incentive programs, protocols building on top can direct these incentives towards value-additive users. 

  • In addition to their native token. 

• Ongoing utility: 

  • NFTs can offer recurring benefits or unlock new features over time, providing a reason for users to stay engaged with the platform.

• Subscriptions

  • Crypto SaaS platforms

  • Gaming - access to in-game items/content/guilds

• Exclusivity

  • Taps into human psychology well, people want what they can’t get

• Utility

  • Could give fee discounts / boosted yield etc

  • In addition, NFTs can be used interoperably within a protocol’s platform. 

  • NFTs that grant access to services, events, or membership perks can draw in users looking for those specific benefits.

• Collaborations & community building

  • NFT projects often come with a community aspect, which can be appealing to those looking for a sense of belonging or shared purpose, like the GMX Blueberry Boys Club. 

• Marketing and partnerships

Referrals

Referral programs leverage the power of word-of-mouth marketing by encouraging existing customers to refer new ones in exchange for rewards or discounts. Tapping into your customer base means businesses can acquire new customers at a lower cost while simultaneously strengthening customer loyalty. So what do referral systems look like?

Tiered Rewards System

A tiered rewards system is an excellent way to incentivise customer loyalty by offering increasingly valuable benefits as customers progress through different tiers based on their engagement and spending or activities with each tier representing a higher level of commitment (time/money) that increases stickiness between the consumer and the brand. With greater inputs, progressive tiers should also offer increasingly more meaningful rewards.

Referral programs have been expertly executed by large web2 brands such as Sephora’s loyalty program. As a cosmetics retailer, customers could earn points with each purchase and as they accumulate points, they move up to higher tiers. Higher tiers gain exclusive benefits such as early access to new products, birthday gifts, and invitations to exclusive events. A tiered strategy like this encourages customers to keep shopping to unlock further rewards and significantly boost retention. 

Gamification of Loyalty Programs

Gamification involves adding elements of fun, competition, and rewards to the loyalty program, turning it into an engaging experience for community members. Gamification elements could include features such as badges, points, and challenges. 

Referral Incentives

Web3 brands can build a similar referral strategy with incentives in high demand. For example, gaming projects could offer exclusive skins / in-game items. 

Airdrops

Posted a few articles on this here & here but will tl;dr our thoughts. Airdrops to date attract mercenary capital, @joel_john95 put out a great piece looking at cohort retention of some airdrops. 

• He looked at the cohort retention of different airdrop designs. 

  • First was the retroactive airdrop where in these cases, users are given tokens that could be sold immediately. In comparison, the one that gave tokens directly to users with no incentive for holding saw only 0.5% of its user base still active on the product at the end of 11 months.

  • Compared to a points-based system and gave users tokens after almost eight months of use, the points-based system retained 10% of its users at the end of 11 months.

  • As we compared case studies in different airdrop design between retroactive, conditional and recurring, it’s clear that a design that incentivises recurrent users is more successful at retaining users than a design that doesn’t. As started with Blur, gamification of airdrop design through encouraging different protocol activities will improve retention as users hopefully return to certain features which solve a problem for them.

Guilds

Guilds are a group of crypto-collective people (developers, designers, and thinkers who share resources be it knowledge or labour, in the pursuit of a common goal. Commonly appearing within the gaming sector, guilds can appear as craft-specific DAOs where members work together and contribute to projects. As they do so, they earn financial rewards/equity in the organisation in the form of tokens. Guilds are entities that can have a lot of active members all adding to the DAU of the game, retaining at an incredibly high rate. They help to improve retention through:

• Community engagement as players collaborate and compete together

• Resource pooling can lower the barrier to entry for games

• Education and onboarding

Stay tuned as next week we’ll dive into the concept of ownership and optimising token design toward retention.